Surprise jump in Japan’s machinery orders data – Is this a one-off figure or will it persist further?

The Japanese government released its latest machinery orders data for the month of November 2013 on January 16, 2013, which showed an increase of 9.30 percent on a month-on-month (mom) basis, versus the prior month’s figure of 0.64 percent and ahead of the Reuters consensus estimates of 1.20 percent. On a year-over-year basis, machinery orders, the figure showed a similar surprise, showing an increase of 16.60 percent, versus the prior year’s figure of 17.79 percent increase, and ahead of the Reuters consensus estimates of 11.70 percent. On the corporate goods price index, also known as the CGPI, it rose by 2.50 percent on a year-on-year (yoy) basis for the month of December 2013, much in line with the Reuters consensus estimates of 2.60 percent. A chart illustrating the quarterly trends of Japan’s machinery orders, measured on a year-over-year (yoy) basis is as follows:

Chart showing Japanese Machinery Orders - January 16 2014

Source: Thomson Reuters

Looking at the quarterly trends of the chart, it appears that the machinery orders data is showing signs of an increasing trend. As of 0825 hrs (Hong Kong/Singapore time), the spot Japanese Yen (JPY) currency was trading at relatively tight spreads of 104.64 – 104.65 (bid/ask), while the Nikkei 225 stock index was trading at approximately 15,899 to 15,900 levels, up by 89.00 to 90.00 points or 0.56 percent on an intraday basis.

With the latest release of the latest machinery orders from Japan, the question in many investors’ minds might be, is Japan on the right path when it comes to meeting the broader economic and social reforms under ‘Abenomics’, and whether the major Japanese stock indices, including Nikkei 225 will achieve similar or even better performance than it did in 2013? A reading of some of the market strategists interviewed on Bloomberg Television’s ‘First Up’ programme during the early Asian trading hours showed mixed outlooks, including Blackrock Inc. (BLK) Managing Director Mr. Russ Koesterich, who expressed quite a bullish optimism over the pace of reforms in Japan, and recommended investors to long the Japanese equity markets, while another market professional, Mr. Alex Friedman, Chief Investment Officer (CIO) of UBS Inc., expressed somewhat of a cautious view, when asked about his reaction of the latest release machinery orders data, and the pace of reforms under ‘Abenomics’, he replied, saying that the first two so-called ‘arrows’ (Fiscal, and Monetary) seemed to be working, but the third ‘arrow’, or the structural reforms, continue to face challenges on the political front. The only solution, he said, was the Japanese government, namely the Bank of Japan (BOJ) should be advocating for a continuing decline in the Japanese Yen currency, and he is relatively optimistic about the Japanese equity markets in 2014. In fact, during early Asian trading hours on January 16, 2014, Bank of Japan (BOJ) Governor, Mr. Haruhiko Kuroda was quoted on Reuters saying that he was relatively optimistic about the inflation outlook, and the pace of monetary reforms. He also expressed his optimism that the pace of reaching the overall BOJ’s goal of 2.00 percent inflation target, as measured by the core Consumer Price Index (CPI) remained on track.

The International Monetary Fund’s (IMF) Managing Director, Ms. Christine Largade spoke at the National Press Club event in Washington D.C. on January 15, 2014, expressed her relative cautious optimism over the outlook of the world economy in 2014, and when asked about the pace of reforms taking place in Japan under ‘Abenomics’, she was quoted by Bloomberg News saying that the IMF was quite ‘disappointed’ by the lack of concrete results shown, especially on the structural front.

Based on the various remarks made by several market professionals, and the IMF, it seems that in 2014, the thought is that Japan might be that the country is unlikely to repeat the same or even outperform like what it did in 2013 in terms of overall economic growth, production growth, exports growth, the various attempts (Fiscal and Monetary) to devalue the Japanese Yen currency, among others. The only bright spot might be the Japanese equity markets, but the question is whether the pace of the continued declines in the Japanese Yen currency, and the rise in the stock markets are sustainable in the long-run, particularly when dealing with a growing debt burden, aging population, lack of progress on the structural reforms, consumption tax rise to 8.00 percent in April 2014, relative disappointment shown on the corporate spending front, lagging pace of wage inflation to cope with rising consumer prices, low female labour force participation rates, among others.

The overall outlook for Japan in 2014, I believe, will be quite mixed, especially with the lack of continued progress shown on the structural reforms side. Although the Japanese equity markets have been rising all year long, except for the occasional falls, which are not very significant, when comparing on a year-over-year (yoy) basis, which was up by close to 45.31 percent, and showing not many signs of retreating back at a significant pace, I do think that at a relative Price-to-Earnings, or P/E multiple of 20.50 to 21.00 times for the Nikkei 225 index, it does show somewhat quite expensive when compared to the US S&P 500 index which was trading at approximately 14.00 to 17.00 times P/E multiple. The weakening Japanese Yen currency could be one of the contributing factors for the rise in the Japanese equity markets, but I do acknowledge that the Japanese equity markets has rebounded from its recession lows in the late 1990s, and it could be one of the major outperformers in 2014, but with the onset of the sales tax hike in April 2014, and the lack of progress shown on the structural reforms, the outlook for the Japanese economy could be mixed in 2014.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc